RDR and your career as an Intermediary
How will my career as a financial adviser change as the Retail Distribution Review (RDR) comes into play? Jacques Coetzer, General Manager: SPF Distribution says he is asked this question frequently. “There will undoubtedly be significant changes in some areas, and others will be less affected or not change at all. While the finer details of RDR are still being ironed out, on some of the primary principles in the proposals little has changed in the recent past in terms of a future dispensation.”
Here are Coetzer’s answers to eight FAQs relevant to intermediaries as we navigate the changing regulatory landscape brought about by RDR.
1. Under what intermediary model will I be able to render financial services?
Currently, financial advisers can be ‘tied’ to a product provider, completely independent or, within limitations, a combination or both. This will change slightly because under RDR there will only be two intermediary models permitted: product supplier agents (PSA), currently known as a “tied agent”, and registered financial advisers (RFA), currently known as independent brokers. An RFA may be either a natural person (sole proprietor) or a legal entity (RFA firm). Intermediaries will not be allowed to operate in both capacities simultaneously. Both RFAs and PSAs will be allowed to use the term financial planner if they have met certain professional body standards.
2. What products will I be able to sell?
This will differ according to which of the two intermediary models you operate under. A PSA will only be allowed to market and sell the products offered by the product supplier they represent. Where the product supplier is part of a group structure, the regulatory provisions will make it possible for the PSA to render financial services in respect of the products of the Group. An exception will be allowed where a product supplier does not have products in a specific line of business. The product supplier will be able to source products from another, external product supplier, thus enabling the PSA to sell the products of the external supplier that have been sourced in this way (referred to as “gap filling”).
An RFA will continue to act like an independent broker today. They’ll be able to sell multiple product lines from different suppliers, as contracted with those suppliers.
3. Which intermediary model will be the most beneficial for me?
There is no one answer to this question. The most suitable intermediary model for an individual really depends on personal circumstances and appetite for risk. Both intermediary models offer specific benefits that come at a specific price e.g.:
a PSA will have a limited range of products but in some cases could have more flexibility in remuneration and incentive structures;
an RFA will have a wider range of product suppliers and products.
A PSA will enjoy all the same benefits that a tied agent does today. They will be remunerated under the equivalence of reward principle (which remains to be finalised). While the arrangement may vary slightly, in many cases the income structure of a PSA will essentially correspond with that of an RFA, with the difference that additional benefits may be on offer for specific purposes. It is also likely that product suppliers would be able to assist new PSAs financially to enter the industry. The PSA and product supplier will contractually agree on the appropriate structure.
An RFA, being an independent business owner on a separate FSP license, will be entitled to a combination of commissions and fees as determined in the RDR proposals.
4. Where will advice risk reside?
A PSA writes business under the product supplier’s FSP license as their agent, which means the advice risk resides with the product supplier. There is therefore potentially a lower risk from a personal liability perspective than would be the case with an RFA.
For RFAs, as the practice owners, the advice risk resides with the RFA entirely. Advice provided by RFAs should not be subject to influence by or bias in favour of any products or product suppliers. An RFA will be operating a business in a highly legislated environment, which means they carry all the business and legislative risks. Big corporate brokerages and their representatives will both be seen as RFAs. The brokerage carries the advice risk and could recoup some or all of its losses from the individual representative who gave the inappropriate advice.
5. Will it be more lucrative to offer one group’s products or multiple product lines?